Environmental, social and governance disclosures and value: financial incentives and performance in Fortune-500 firms

Purpose This study aims to examine how two internal financial governance mechanisms, executive compensation and financial leverage, interact with environmental, social and governance (ESG) disclosure to influence firm performance measured by return on assets, return on invested capital (ROIC), Tobin's Q, market capitalization and free cash flow among large US corporations. Design/methodology/approach Using panel data from 200 Fortune 500 firms between 2007 and 2022, the study adopts a multi-step empirical approach. Descriptive and correlation diagnostics precede regression analyses based on pooled ordinary least squares, fixed effects (FE) and two-stage least squares (2SLS). Findings Results show that executive compensation and leverage are negatively associated with return on assets, ROIC and market capitalization across FE, 2SLS and generalized method of moments (GMM) models. ESG disclosure moderates these effects in a two-sided way: it strengthens market-based evaluations of firms with high leverage or generous executive pay but offers little improvement and may even intensify performance declines on accounting measures, reflecting the dual signalling and operational pressures of ESG engagement. Originality/value Moving beyond prior studies that view ESG as a passive outcome, this research conceptualizes ESG as an active moderating mechanism within corporate governance. The findings advance agency and legitimacy theories by illustrating how sustainability disclosure reshapes the governance–performance nexus, offering relevant insights for boards, regulators and stakeholders navigating the complexities of financial and non-financial alignment.